Plug saving-investment gap with FDIs

SAVINGS & INVESTMENT: Fine-tuning of foreign investment policies needed

Since investment and savings rates are likely to be slow in the next financial year, too, the Economic Survey on Thursday called for fine-tuning of policies to attract foreign direct investments.

After the Reserve Bank of India tightened the screws on borrowings to fight inflation, the resultant rose in interest rates dampened investment growth, which was estimated to fall to 5.8 per cent in 2011-12 (advance estimates) from 11.1 per cent last year, the survey said.

The investment rate stood at just 35.1 per cent of GDP in 2010-11, against 36.6 per cent in 2009-10. This could be attributed to slowing global economy and domestic factors like increased cost of borrowing due to high interest rate to curb inflation. The investment rate in 2010-11 was the lowest since 2006-07 — except the 2008-09 crisis period when it fell to 34.3 per cent — the survey said.

On the other hand, the savings rate declined from 33.8 per cent in 2009-10 to 32.3 per cent in 2010-11, due to a reduction in private savings — primarily household savings in financial assets, and slack ening corporate savings. However, public savings registered an increase due to fiscal consolidation.

At a press conference, chief economic advisor Kaushik Basu said savings and investment rates in India could further slow for another year.

The Survey said investment requirements in India would continue to exceed the availability of resources from domestic savings and suggested covering the savings-investment gap through foreign direct investment. It added there were several sectoral issues that needed to be addressed and continuously fine-tuned to attract FDI.

The savings-investment gap remained at 2.8 per cent of GDP in 2010-11, the same level as in 2009-10, reflecting the need to finance the investment requirement from foreign savings.